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Case law: Clauses excluding liability for ‘consequential losses’ can have different meanings in different contracts

Parties to contracts which exclude liability for ‘consequential loss’ should consider whether the ‘usual’ meaning of consequential loss applies to the contract – or whether consequential loss has some other meaning – following a recent case.

Legal Alert

This update was published in Legal Alert - January 2017

Legal Alert is a monthly checklist from Atom Content Marketing highlighting new and pending laws, regulations, codes of practice and rulings that could have an impact on your business.

A company contracted to build a cargo ship for a customer. The contract contained clauses specifying that the company would be liable for the costs of repairing defects arising from their work, and for any physical damage the defects caused, but it excluded liability for ‘consequential or special losses, damages or expenses’.

There was a serious engine failure eight months after the ship was delivered. As a result, the customer incurred various financial expenses and losses. There was a dispute over whether the exclusion clause protected the company against liability for those losses.

Contract clauses excluding liability for ‘consequential losses’ usually means special losses, over and above those which would ordinarily be supposed to have been in the parties’ reasonable contemplation at the time they made the contract. For example, it will be within the reasonable contemplation of a furnaces supplier that profits from any material in the furnace will be lost if it breaks down. A clause excluding liability for consequential losses will not protect the supplier in those circumstances. However, unless specifically pointed out to them, the supplier will not know (ie, it will not be in their reasonable contemplation) that the result of the furnace breaking down is also that the company loses a major contract. In those circumstances, the loss of the contract is not within the contemplation of both parties and is usually a consequential loss, so the supplier’s exclusion clause will protect it.

In this case, the customer argued that its losses were not special – they were in the reasonable contemplation of both parties at the time the contract was made. Therefore, the clause excluding liability for consequential losses did not protect the contractor from liability.

The High Court ruled that the normal meaning of ‘consequential losses’ did not apply in this case. It said the wording of the relevant clause in the contract was clearly intended to exclude the company’s liability for any losses beyond those that were specified, ie, any losses beyond the cost of repairing defects and any resulting physical damage.

So, in this case, consequential loss did not have its normal meaning – it meant any losses over and above those specified. The exclusion clause was therefore effective.

Operative date

  • Now

Recommendation

  • Parties to contracts which exclude liability for consequential loss should consider whether the ‘usual’ meaning of consequential loss applies to their contract or whether, in the context, it has some other meaning

Case law: Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941

Disclaimer: This article from Atom Content Marketing is for general guidance only, for businesses in the United Kingdom governed by the laws of England. Atom Content Marketing, expert contributors and ICAEW (as distributor) disclaim all liability for any errors or omissions.